hi all, i have been reading all these news about investment banks going bankrupt due to the over-exposure they have over subprime mortgage, which to my knowledge they have been using as one of their tools for financial gains.
The thing i dont know is, HOW DID THEY BUILD UP SUCH A HUGE EXPOSURE?
Assuming subprime mortage have been purchased by investment banks from mortgage banks over the years, how did it go bust just over a few months?
according to wikipedia, there is a “loss of U.S. $435 billion as of 17 July 2008”.
where did the $435billion of housing debt come from?
After watching a few bbc doumentary, i understand that subprime mortgage is more or less given to people with very poor credit ratings. however, if u divide $435b by the price of houses most likely purchased by someone with poor rating, it’s still an enormous number. It really puzzles me as to the scale of this crisis and how it can happen over such a short period of time. why would SO MANY PEOPLE suddenly just stop paying mortgages in this period?
I really love to hear from people who understands the situation,as i dont live in the US, preferably with a micro view (too many reports with just a sketchy macro view) of the situations amongst the defaulters. such as why they do it, and the processes that lead to the crisis today. thanks
Tonymand is right, this didn�t happen over night. I used to work in the mortgage business and the company that I worked for got started (and stayed) in the subprime market (thus the �used to work�). Basically people were getting 2-5 year interest only loans, with 0% down on the house they were purchasing. The thought was, get this great house that you can bearly afford with no downpayment, let it build in equity and then refinance before your loan recalculates.
There are a few problems with this, one was the assumption that housing prices would rise in equity in areas where they were already over priced. The second was that people were qualifying only on the first part of the loan, before the recalculation.
Example: Bob finds a house for $400,000, he talks with a loan broker (who is paid by the amount of loans that they originate) who �helps� him qualify for a loan that has a 5% teaser rate for the first 2 years and Bob won�t have to put any money down, giving him a payment around $1600. 2 years later Bob�s loan is getting ready to recalculate to 8% which will boast his payment up to $2600, a $1000 increase. Bob doesn�t have that kind of extra money around, so he goes to refinance his loan. Well, due to the fall of housing prices and the fact that Bob put no money down on his home, Bob is unable to refinance his home because there isn�t any equity in it.
Unfortunately, people have been qualifying for subprime loans for some time now and the longer we go with lower housing prices, the more people that are going to be foreclosing because they can�t afford their current loan and they can�t refinance because there isn�t any equity in their home.